Subprime Bailout

I don't have much time, but this got me a little fired up, so I felt the need.

As you may have heard, the government will roll out its plan today to do a 5 year rate freeze on subprime mortgages that were issued between January 2005 and July 2007 for people who are current in their payments, but would likely default when rates reset to the real rates (now that their teaser rate period is coming to an end).

I am sure this is going to be a blessing for some families who are legitimately in over their heads. I don't want to come off as callous or unfeeling about this situation, but I do want to point out a couple of negatives I think it creates.

1. By bailing out the American consumer who is already clearly too deeply in debt to keep up, the government is in effect going to encourage more reckless spending behavior. My guess is that it'll take about 2 weeks for most of the people effected by this to forget that they just got a huge gift and they'll be right back to buying things they can't afford rather than using this reprieve to save and invest in order to protect themselves financially for the years to come - i.e. being good stewards.

2. There has been much buzz in the media of late about whether we're about to slip into a recession. I am not an economist, don't claim to be, but I think this part is pretty simple. By bailing out subprime borrowers and enabling them to keep spending - which is what really props up our economy anyway since we're running a huge trade deficit at present - I think they have just delayed the downturn in the economy. I'm not for a recession, that hurts everyone, but my fear is that by delaying it a few years potentially, it will be more pronounced and we'll all suffer more because the forces behind it will have had more time to build. Again, I'm not an economist.

3. Bailouts are the antithesis of capitalism. I think every time the government bails a group out they really weaken our economic system. Again, I run the risk here of coming across as unfeeling and callous, but that's not really the case. My argument here is that our economy - the greatest in the world in terms of long-term performance and providing opportunities for the masses to succeed - is built on the premise of risk and reward. The larger the risk, the greater the reward (theoretically). What has happened here, however is that large risks were painted to be very small, but still carried large rewards - and it happened on both ends of the equation. Home buyers (buying homes they couldn't afford with loans they couldn't pay) and lenders (lending to borrowers that weren't qualified) who took large, foolish risks are being saved from the economic consequences of those decisions. And who is paying for it? The rest of us. It's called tax money. Now I do believe that help should be there for families who are in peril because of the subprime situation, but I don't think it's the government's responsibility to bail them out. I would argue that private organizations should be reaching out to community members in need and helping them with legitimate restructuring of their debt, alternate housing, etc.

4. The other group that needs to pay up is the financial services industry. They started this mess and while I think responsibility falls on every person who signed onto an ill-advised subprime note (the home buyers) the one group not really paying the piper is the group that found "creative" (I'd call it borderline fraudulent) ways to package the resale of these mortgages so they would carry investment grade debt ratings so that retirement and mutual funds could own them. So now, in addition to the home owners taking the hit, people are losing truckloads in their retirement accounts because these Mortgage backed securities are failing. A few of the large financial firms are taking a hit on this because they drank the cool-aid themselves - by actually spending their own money to own these improperly rated investment instruments. Of course the ones suffering over that are the lower level people whose jobs are being eliminated. The brass who made the decisions all got fired and used their golden parachute to double their net worth (when top level people sign on at a company, they're guaranteed millions if they get fired, in some cases they make more for getting fired than they would have made in years at the firm).

The details of how this all happened are more than I will get into, but the bottom line is that the rich got richer and it came at the expense of the poor and now the government is bailing the poor out at the expense of the rest of us.

Let's be clear about something, the fundamental problem here is human greed - not our economic system.